Beats Won't Get $3.2 Billion From Apple

By John Martellaro

May 27th, 2014 2:20 PM EDT

The Apple deal with Beats is probably going to happen. The whole affair is likely in lock-down mode until the WWDC Keynote. What's not going to happen, however, is that Beats gets US$3.2B in this deal.

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Previously on TMO , Bryan Chaffin made a compelling case for Apple's acquisition of Beats. "Apple + Beats Reportedly about Preserving Music Industry and Hiring Iovine/Dre." The argument was not so much about the headphones business or the number of Beats customers as it is about building an appealing, expert music system that complements rather than damages the current iTunes ecosystem and artists. So far so good.

Even so, when I think about the course of events, I have the distinct feeling that the value of this sale isn't going to be what some thought it would be.

First, we heard that number early and not from Apple. Then the number reverberated in the Apple echo chamber for weeks, as if the repetition could make it a fact.

Second, there was great puzzlement by observers how a company that only generated $1.4B in revenue in 2013 can be valued at $3.2B. The asking price seemed out of sync with the company's annual revenues, and that can only mean, in my perspective, that the original number was floated by Beats, then later negotiated to a more realistic number.

Finally, while Apple has a lot of cash on hand, the executive team has always been very level headed, indeed tight fisted with its money. A large corporation doesn't get rich by squandering its money. Rather, it flourishes by spending frugally and wisely, as needed, to maximize growth and profits.

I remember a time when the Apple sales teams couldn't get Phil Schiller to pay Sun Microsystems a mere $100,000 for a license for special Java scientific package the customers needed. Mr. Schiller didn't like the idea that Sun would hold that package back, and so the deal never went through — as I recall.

It's all water under the bridge now, but that and other occasions showed me that Apple is very tough, tight-fisted, and pragmatic with its discretionary funds. Many a partner or acquired company has gone into meetings with a wealthy Apple and thought they were about to become wildy rich. The most extravagant expectations are seldom met.

I can just imagine Apple's lawyers going over the Beats financials in great detail and coming up with a much more sobering number.

Finally, there have been reports that Apple was outraged over Dr. Dre's boast about how he was about to become a billionaire. That annoying departure from secrecy never sits well with Apple's discreet executives and adequately explains why nothing has been heard since. Tough, quiet, sobering negotiations have followed with an embargo until WWDC.

My prediction is that the $3.2B number was an opening bid. The premature publicizing of that number by Dr. Dre and the near universal puzzlement as to how the number could be that big can only mean one thing. When CEO Jimmy Iovine and hip-hop legend Dr. Dre walk onto the stage at WWDC, they'll be swallowing their pride. If a number is publicly announced, I'm guessing it'll be well under $2B.